Why I Remain Bearish on BCE Inc.

BCE Inc. (TSX:BCE)(NYSE:BCE) has been a solid dividend-growth king that has returned a lot of capital gains to shareholders over the past few years. As interest rates rise and competition heats up in the telecom scene, is BCE still an attractive long-term bet? Or should Canadian investors opt to trim their positions as incoming headwinds pick up?

Shares of BCE are down nearly 7% over the past year, and the dividend yield has climbed to an attractive 4.86%. If interest rates were going to remain lower for a longer period of time, then the recent weakness may be a buying opportunity, but here’s why I’m not in a rush to pick up shares on the recent dip.

BCE is an absolute behemoth, and slowed growth is inevitable from here. That means investors need to readjust their expectations going forward because the huge amount of stock price appreciation obtained in the last couple of years probably won’t be in the cards over the next few years.

The fat dividend may seem like a good reason to pick up shares, but long-term investors need to realize that both dividend growth and capital gains will probably be very modest going forward. If you’re all right with that, and you’re just after the stable income, then you can buy shares, but don’t expect shares to surge 10-15% on an annual basis, because there are many headwinds the company will be working against.

In the most recent quarter, BCE saw its net income fall to $762 million from $778 million delivered during the same quarter last year. Part of the blame was due to the amortization of the acquisition price of Manitoba Telecom. The wireless segment was strong with 88,611 net postpaid wireless subscribers gained in Q2, but the internet and Fibe subscriber growth came in short of many analysts’ expectations.

Overall, the quarter was nothing to write home about, even with the addition of a considerable amount of wireless subscribers. BCE’s spending on network upgrades is expected to increase in the years ahead to remain competitive with new entrants that are likely to disrupt the Canadian telecom scene. Over the next few years, we could witness an increase in capital expenditures as interest rates continue to rise. This isn’t a great combo and will likely lead to a smaller magnitude of dividend growth going forward.

Bottom line

The telecom business is incredibly capital intensive and rising interest rates are a clear negative for all telecoms. Going forward, CRTC regulations and new wireless competitors are going to create a tougher environment for BCE to thrive in like it has over the past few years when interest rates, competition, and regulations were all lower than they’ll be in the years ahead.

Stay smart. Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

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